Soy export in Paranaguá — Foto: Fabio Scremin/APPA
With upward revisions, especially regarding prices, the Brazilian Association of Vegetable Oil Industries (Abiove) started to project the revenue of soy exports (beans, meal and oil) at $57.953 billion in 2022. The record amount is $6.51 billion higher than what was forecast by the association in March and, if materialized, will represent an increase of 20.7% year over year.
For soybeans, Abiove now estimates revenues of $46.32 billion, resulting from shipments of 77.2 million tonnes at an average price of $600 per tonne. The previous calculations indicated $41.181 billion (77.7 million tonnes at $530 per tonne). In 2021, revenues totaled $38.636 billion (86.108 million tonnes at $449 per tonne).
As for soy meal, the current scenario for 2022 indicates $8.51 billion in revenues, with sales of 18.3 million tonnes and an average price of $465 per tonne. In March, Abiove estimated revenues of $8.052 billion (18.3 million tonnes at $440 per tonne). Last year, the amount reached $7.37 billion (17.21 million tonnes at $428 per tonne).
For oil, Abiove revised its projection for export revenues to $3.123 billion, the result of 1.8 million tonnes shipped at $1,735 per tonne. In March, the projections indicated $2.21 billion (1.7 million tonnes at $1,300 per tonne). Last year, import revenues totaled $2.017 billion (1.651 million tonnes at $1,222 per tonne).
The price adjustments are in line with the curves seen in the international market since the beginning of the year and confirm analysts’ assessments that there should be no significant drops in the coming months, in view of the lower grain supply in Brazil, Argentina, and Paraguay due to weather problems, the effects of the war in Ukraine on the wheat and corn markets, and heated demand in India.
The trend of increasing the planted area in the United States in the 2022/23 season has not been enough to bring prices down. Brazil is the global leader in production and exports of soybeans, followed by the U.S.
Also in the new report it released on Tuesday, Abiove adjusted its estimate for the 2021/22 soybean harvest in Brazil to 125.4 million tonnes, 9.7% less than in 2020/21. Processing this year was maintained at 48 million tonnes, just above 2021, with production of 36.685 million tonnes of meal and 9.7 million tonnes of oil.
Embraer’s Eve and Zanite agreed to merge air mobility businesses — Foto: Divulgação
Embraer unveiled that it has completed the business combination between its subsidiary of air vehicles for urban mobility — the so-called “flying cars” — Eve, and U.S.-based Zanite Acquisition. The merger gives rise to a new company, Eve Holding, now listed on the New York Stock Exchange. Embraer closed down 7.98% on the B3.
Embraer Aircraft Holding holds 238.5 million shares of Eve Holding common stock, representing approximately 90% of the existing common stock. The remaining shares are held by Zanite’s market shareholders — by the sponsor and certain third party investors that entered into subscription agreements to purchase common shares at the closing of the business combination, Embraer said.
“The business combination is in line with the company’s innovation and growth strategy, and its consummation reinforces the company’s commitment to achieving these goals,” Embraer said. The merger was unveiled in December last year.
In a note, Eve co-CEO Andre Stein said the transaction provides the startup with “growth capital and positions Eve well to execute its development plans, aided by our ongoing strategic partnership with Embraer.”
“We intend to further strengthen our position as a leading global UAM [urban air mobility] player by delivering an effective and sustainable new mode of urban transportation,” he added.
Co-CEO Jerry DeMur indicated that the closing of the deal puts Eve on course to continue developing its solutions.
Last week, Eve revealed that since December its order backlog rose to 1,825 units from 1,735 electric vertical take-off and landing vehicles (eVTOLs), made through non-binding letters of intent from 19 customers. Among the customers are fixed-wing operators, helicopter operators, sharing platforms, and leasing companies.
Input retailer Disam, which has 27 stores spread throughout agricultural producing regions in the state of Paraná, recently stopped selling fertilizers. According to head of commercial Carlos Zorzetto, producers do not want to pay the current high prices. In the state of Rio Grande do Sul, another important agricultural producing region, fertilizer application is expected to decline between 10% and 15% this year, with a projected consumption of 4.6 million tonnes. In the state of Mato Grosso, Brazil’s heavyweight soybean-growing region, fertilizer sales are also expected to decline.
The reflections of the new high prices of nitrogen, phosphates, and potassium in 2022, which have already risen between 100% and 200% last year, are beginning to gain concrete contours in the day-to-day in the field at an important time of the year. In the second and third quarters there is a concentration of purchases of inputs, especially for the 2022/23 season, which begins in September.
A projection recently elaborated by consulting company MacroSector, specialized in agribusiness, points to a $7.3 billion expenditure with imports in the second quarter, an amount that, if becomes a reality, will represent an increase of 193% in comparison with the same period of 2021. “We have already seen a 300% increase this year in potash,” says Mário Sérgio do Prado, CEO of Coonagro (Paraná). The cooperative has a mixing machine.
The high disbursement projected by MacroSector for the current quarter, however, is expected to buy only 8 million tonnes – 2% less than the volume purchased by the country in the same period of 2021. In the first quarter there was already a decrease. Brazil bought 8% less chemical fertilizers than in 2021, spending 109% more, Secretariat of Foreign Trade (Secex) data indicate.
In April, partial data showed a 10% increase in the volume imported in relation to the same month in 2021. “There was a movement of anticipation of purchases,” recalls Fabio Silveira, managing partner at MacroSector. There can be a gap of 45 to 60 days between the signing of fertilizer contracts and delivery, especially in a geopolitical context like the current one. The concentration, therefore, does not necessarily represent an evolution in the volume imported during the year.
According to Mr. Silveira, the trend is that the scenario will repeat itself in the third quarter. “Everything indicates that, with this, we may see a reduction in the cultivated area. But there will be no shortage of food,” he concludes. Producers have sought alternatives to maintain productivity per hectare and the margin of their business.
In the state of Rio Grande do Sul, for example, one way to mitigate the impact of prices has been to choose nutrients with less technology applied. “If the producer used a premium formula, he now chooses a less concentrated one,” says Diego Wasmuth, input commercial manager with Cotrijal, based in Rio Grande do Sul. Without this, the drop in application in the state would be 20%, continues Mr. Wasmuth.
“Each soil is different,” says Mr. Prado, with Coonagro. According to the executive, the land in Paraná, for example, has a fertilizer bank due to years of planting techniques. If a producer in the region applies 30% less fertilizer, there will not be a significant impact on productivity this year.
The point of view is similar to that of SLC Agrícola’s CEO, Aurelio Pavinato. In a recent interview with Bloomberg, he told that the company, which grows soybeans, corn and cotton, plans to use between 20% and 25% less fertilizer in the 2022/23 season. “It is possible to cut fertilizer in one year and have zero impact on production,” he said.
In the state of Mato Grosso, the Mato Grosso Institute of Agricultural and Livestock Economy (IMEA) is concluding a survey on input sales. “But there is already a certainty that the application of fertilizers will be lower, especially for those who left it to the last minute,” says IMEA’s superintendent Cleiton Gauer. With the increase, fertilizers now represent 46% of the costs (average so far) in soybean in the state, against 33% in the previous season.
The challenge of inflation, which was already a tough one, has become even more arduous. Inflation medium-term expectations are increasingly unanchored considering projections of market economists and the inflation priced into financial assets. The consequence is clear in the behavior of the interest rate market, which has come under pressure amid the perspective of even higher rates for a long period of time.
Strong swings in the rates of the NTN-Bs, the government bonds pegged to Brazil’s official inflation index IPCA, shows a worsened perception of inflationary risk ahead. The inflation priced by NTN-Bs maturing in August is close to 9% — it reached 8.73% on Friday. Expectations seem to be increasingly unanchored even for those with longer maturities. The inflation priced by the NTN-B maturing in August 2050, which started the year at 5.19%, reached, at the end of last week, 6.39%.
“The market has been pricing the gasoline lag in recent days. People start to account for the impact of the adjustment on fuel prices and its side effects. From there, they start to include inflation premiums in the curve,” said Pedro Nunes, ACE Capital’s fixed income manager, when justifying the strong upward movement of inflationary expectations in the market. On Monday, Petrobras unveiled an 8.8% adjustment in diesel prices at the refineries but kept gasoline prices unchanged.
The strong rise in fuel prices abroad also helps explain the recent advance of the breakeven inflation, said Maurício Patini, Brazil interest rate manager at Absolute Investimentos. He added that the current inflation data for the first quarter of the year also help explain the rise in market inflation, since they are higher than expected.
According to Mr. Patini, this generates more revisions due to the high correlation with a large part of regulated prices “and shows that the Central Bank’s job has become more difficult, given that inflation is widespread.”
Not coincidentally, interest rate futures have been under considerable pressure in recent days, as the market begins to see more clearly the Selic, Brazil’s benchmark interest rate, at an even higher level for a longer period. “People have the end of the cycle in their minds, but we believe that since inflation is rising, it is difficult for the Central Bank to indicate that it will stop. It is a very big risk. We think that a 50-basis-point hike in the next meeting is the floor,” said Mr. Nunes, with ACE Capital.
For him, the likely adjustment in gasoline prices and a still very pressured external inflation show how difficult Central Bank’s job is now. “I think it is very risky for the Central Bank, as the policymaker, not to keep inflation in check and then be forced to raise interest rates again later on. He can’t take that risk. That is why we think the Central Bank could end up raising interest rates a little more,” Mr. Nunes said.
The concern regarding an even more challenging inflation is also materialized in the projections of market economists. Last week, J.P. Morgan raised its projection for the IPCA in 2022 to 9.1% from 8%; Safra increased its estimate to 8.1% from 7.3%; Itaú Unibanco now sees the IPCA at 8.5%, and no longer at 7.5%; Banco do Brasil raised its projection to 8.5% from 7.8%; and BNP Paribas now expects inflation to end the year at 10%, and no longer at 8.5%.
Part of the recent worsening of expectations reflects agricultural supply shocks; the proximity of the summer in the United States., which is likely to increase demand for diesel; and the possibility of European sanctions on Russian oil. “We are very likely to experience a period of major supply shortages in the next two, three months,” said Carlos Thadeu Freitas Gomes Filho, a senior economist at Asset 1. His concern is translated into a projected IPCA of 9.5% in 2022, with chances of reaching 10% with the gasoline adjustment, and 5% in 2023.
In BTG Pactual Asset Management’s macroeconomic scenario review, economist Stefanie Birman reveals that the firm now projects inflation rates of 9.7% this year and 6% in 2023. “We saw a broader rise in expectations,” she said. Ms. Birman also pointed out that, regarding the IPCA in the short term, BTG Asset expects that, in the March-May period, the IPCA will be 1 percentage point higher than the Central Bank’s projected in the March Inflation Report. Then, the monetary authority estimated that the IPCA between March and May would be 2.1%.
Paulo Val — Foto: Leo Pinheiro/Valor
The prospect of higher, resilient global inflation is increasingly present in the composition of scenarios, said Paulo Val, chief economist at Occam. “Without a doubt, it will be challenging for our Central Bank. In the past decade and the decade before, global inflation was a disinflation drive for us, and that is an important thing that has changed,” he said. Occam projects the IPCA at 8.4% this year and at 4.6% next year, with an upward bias on both forecasts.
Mr. Val expects another 50-basis-point hike in the Selic in June, to 13.25%. Then, according to him, the Central Bank is likely to wait the elections to evaluate what the new fiscal policy will be. “If they are consolidation policies, that really control spending more clearly and society perceives it that way, I think it eases monetary policy a little bit.”
The fact that inflation has been above the center of the target since the end of 2020 and above the top of the target range since the beginning of 2021 weighs on the longer horizon, Mr. Val said. “It’s a long period already.”
In addition, fiscal policy can be a big question mark in perspectives. “You have this uncertainty about what the fiscal framework will be starting next year, regardless of who wins the elections. This fans inflation,” he said. Besides this and the external challenges already mentioned, there is the fact that emerging countries have a more chronic inflation problem, Mr. Val said. “This whole environment of uncertainty around inflation generates demand for more premium, even over longer horizons.”
The analysts’ mood with the Brazilian economy this year has improved, in the wake not only of a higher-than-projected carry over from 2021 to 2022, but also of stronger current data for the first and second quarter. The assessment is that the first half of the year will be positive, despite the discomfort with rising inflation, due to the recovery of employment, the normalization of services and the extra drive to consumption and credit with government measures. For the second half of the year, however, when the effects of monetary policy on activity should become clear, a falling GDP are expected. In addition, estimates for growth in 2023 waned throughout the year.
The Focus survey’s median of expectations for the 2022 GDP went to 0.7% from 0.3% at the beginning of the year – but there were projections of recession. Financial institutions have promoted revisions to numbers closer to 1%, as did Safra (to 0.8% from 0.2%) and Barclays (to 1% from 0.3%) last week. “Retail trade and agriculture have contributed to economic activity in the first quarter of 2022, proving more positive than anticipated,” says Safra, raising its GDP estimate for the period to 0.7% from 0.3%.
The still ongoing normalization of services – especially those provided to households, but also government services – will be a “big driver” for this year’s GDP, especially in the first quarter, points out Wether Vervloet, economist at ACE Capital. The company, who came to project contraction of 0.5% for the 2022 GDP at the turn of the year, now forecasts a 1.5% growth, with 1.1% in the first quarter and 0.6% in the second. “The data that has been coming out over the year has also been strong.”
The S&P Global service sector Purchasing Manager’s Index (PMI), for example, reported its highest growth in 15 years in April and helped push the private sector manufacturing index (composite PMI) to the highest since October 2007, despite the slowdown in manufacturing, which is not expected to make a very favorable contribution to 2022 GDP.
Last Friday, Itaú raised its projection for inflation in 2022 to 8.5% from 7.5%, but kept the GDP at 1%. According to the team led by Mario Mesquita, the rise in commodities, fiscal stimulus and the reopening of the economy are contributing positively, and the first half is expected to be “robust”.
The expectation is 1% for the GDP in the first quarter and 0.6% in the second, “but our daily indicators at the end of the first quarter (with a relevant statistical carry over effect for the following quarter) and the beginning of the second quarter (data from April) indicate a risk of increase of this projection,” Itaú says.
Economists are also warning about employment. “The latest data on the labor market, together with the improvement in some confidence indicators, confirms more dynamism in consumption/services in the coming months,” writes Roberto Secemski, chief economist for Brazil at Barclays.
The effect of measures since the turn of the year, such as the 10.2% hike of the minimum wage and the expansion of cash-transfer program Auxílio Brasil, which replaced Bolsa Família, may have been underestimated at first, according to Rodrigo Nishida, economist with LCA Consultores. Add to that policies for this year – within the electoral logic, he notes – such as the access to the Workers’ Severance Fund (FGTS) and bringing forward the payment of 13th salary, a year-end bonus, for retired people, as well as the apparent dissaving of families.
Igor Velecico — Foto: Silvia Costanti / Valor
Igor Velecico, chief economist at Genoa Capital, adds that the increases in the state civil service’s wages and the appreciation of the exchange rate, in relation to the beginning of the year, also have an effect on the available income of families. And, in his assessment, credit is still expanding at strong rates. “It is a little more resistant,” he says.
Genoa, which has also projected a 0.5% contraction for the 2022 GDP, now expects a 1.5% increase, and Mr. Velecico indicates that a range up to 2% seems adequate. Fernando Honorato, chief economist at Bradesco, projects 1% for the GDP in 2022, but also did not rule out, during an event, the chance of reaching 2%.
More cautious, Silvia Matos, coordinator of the Macro Bulletin of the Fundação Getulio Vargas’s Brazilian Institute of Economics (Ibre-FGV), maintains the GDP growth projection for 2022 at 0.6% and says she will be surprised with an advance very close to 1% in the first quarter — the FGV Ibre expects 0.4%. “There was a certain bad mood, I never had recession [for 2022]. But the drivers for maintaining growth in the year are weak, services should lose steam, there is very high inflation eroding purchasing power,” she says.
Mr. Nishida, who for now projects the 2022 GDP at 0.7%, says he shares the feeling that activity is stronger, at least in the short term. “But we are a little wary of revising too much upward. It’s still a complicated scenario, with several shocks. Internationally, you have the war and, recently, circulation restrictions in China, which threaten to make supply chains worse again.”
The effect of the strong cycle of interest rate hikes underway since March 2021 is also expected to affect growth in 2023. The projections for next year’s GDP expansion went to the current 1% from 1.8% at the end of December 2022.
In the last three years, of the five acquisitions made, three were in Brazil — Foto: Pixabay
Despegar, the Argentine travel group that controls Decolar, has increased its efforts to grow in Brazil. In the last three years, of the five acquisitions made, three were in Brazil, said Marcelo Grether, the company’s chief M&A and new business officer. In total, about $22 million were invested to bring Brazilian businesses to the group. The most recent one was the acquisition of ViajaNet, an online tourism agency, for nearly $15 million – the largest purchase to date.
“ViajaNet is a 13-year-old company that knows a lot about technology, which is key for us. We aim to grow a lot in Brazil, acquire more companies and look for deals. And this is a company that, along with Koin [a platform partly owned by Despegar since 2020] will help Decolar to be more important, relevant and competitive,” he told Valor.
Under the terms of the agreement signed to buy ViajaNet, 60% of the purchase price will be payable at closing; 20% in 24 months after the acquisition, and the remaining 20% 36 months after the acquisition. To move forward with the deal, Decolar was advised by law firm Tauil & Chequer Advogados, while ViajaNet was advised by Kroll Corporate Finance.
The talks involving the sale of ViajaNet were first reported by Valor in January. The news then was that the crisis caused by the pandemic in the industry has put the travel agency business in jeopardy and encouraged several mergers and acquisitions in recent months, such as that of Flytour and Queensberry. In January, Valor reported that ViajaNet would be the next and that Decolar was interested in cutting a deal.
ViajaNet reported audited revenues of nearly $30 million in 2019. During 2021, ViajaNet’s online sales accounted for 98% of total sales, with 88% of gross bookings originated in the B2C channel and the remainder via the B2B channel. In addition, 98% of gross bookings were within the air segment of Brazil’s travel market. According to Decolar, this gives the company the opportunity to cross-sell its portfolio of lodging and other travel products to ViajaNet’s customers.
Both companies will maintain their brands and work independently in their commercial management. The closing of the transaction is expected to take place in the second quarter of 2022.
Despegar remains on the lookout for acquisition opportunities, moves that have been encouraged by the crisis caused by the pandemic in the industry, Mr. Grether said. “Three things are important to us in acquisitions. One is the location – our focus is on Latin America, especially Brazil. The companies must add value, with great synergies. In addition, integration is as important as the purchase. When we buy something, it has to be something that adds synergy quickly.”
The company has seen a firm recovery in demand, especially after March, when the omicron variant of coronavirus started to affect the tourism industry, the executive said. He declined to elaborate citing that the group will report results next week.
The company reported revenue of $124.6 million in the fourth quarter, up 134% year over year, but 14% below pre-pandemic levels. The group also saw net loss of $10.7 million in the quarter, compared with $28.8 million a year earlier.
John Graham, CEO and president of CPP Investments, doesn’t feel uneasy about investing amid a geopolitical conflict coupled with rising inflation and interest rates in the developed world. At the head of a Canadian investment manager with more than $550 billion in assets under management worldwide, the executive believes that in times like these markets favor long-term investors.
“The best time to invest is when there is fear in the market. The way I think about investments is from the bottom up, from company to company and sector to sector,” Mr. Graham said. In the first half of last year, despite all the concerns brought by the pandemic, CPP took part in several fundraising rounds of Brazilian companies, including Nubank and Iguá, a basic sanitation company.
The best way to protect capital in the face of unchecked inflation around the world is a diversified portfolio, Mr. Graham said. CPP achieves that by having 85% of its portfolio abroad. That amount is divided into real assets, equity stakes and other projects around the world. “I am very grateful that we have built a global footprint, because it helped us a lot during the pandemic,” he said.
The executive believes that real assets such as real estate and infrastructure are naturally protected against inflation. This investment class is precisely the most important for the group in Latin America. The region accounts for 10.1% of CPP’s real assets, 1.2% of investments in private equity, and 8.3% of credit. CPP has $26.2 billion invested in Latin America.
With a strong focus on sustainability-related investments, CPP is one of the controlling shareholders of power generation company Auren in Brazil, together with Grupo Votorantim. One of Auren’s main assets is a hydroelectric power plant, Porto Primavera, which also boasts a renewable power complex that includes solar and wind power generation.
Tania Chocolat, managing director of CPPIB in Brazil, still sees several opportunities in infrastructure in the country and said that the fund is aware of them. “We have achieved greater regulatory stability and today we are in a better position than 25 years ago. There is still a lot of room for investments in sewage systems, for example. It is a way of supporting the country considering the substantial infrastructure bottlenecks we have.”
Mr. Graham recalled that sustainability is much more than just investing in renewable power. “We believe that the global economy will try its best to make a transition to carbon neutrality by 2050. And many calculations are made about whether this will cost $60 trillion or $70 trillion. Either way it’s a big figure, and this economic transition will require patient, long-term capital and partnerships,” he said.
CPP’s portfolio is expected to grow to $1.7 trillion by 2040. The firm’s annualized rate of return is 11.6% for the past 10 years.
John Graham revealed that one of his goals is to have a larger stake in emerging markets in the next five years. “In five or six years, we envision continuing to invest in emerging markets and we expect the percentage in those markets to continue to increase because the importance of emerging countries in global GDP will grow.”
Mr. Graham also said that he sees sustainability and technology as the two main trends of the future. “All companies need to think about what the role of technology is in their industry.”
CPP has expanded its exposure to growth companies, especially startups. “We opened an office in San Francisco to be closer to the U.S. technology industry,” he said.
The production of household appliances faces a deep decline in 2022 due to rising inflation and interest rates. The segment had already been struggling to receive inputs and saw costs soar amid a disrupted production chain and higher commodity prices brought by the pandemic. Now, consumers’ tight budgets – eroded by higher spending on food, electricity and fuel – are taking a toll on manufacturers.
The production of appliances plummeted 25.3% year over year, a survey by statistics agency IBGE shows, the third consecutive quarter of decline. A double-digit contraction is also clear in segments like white goods (refrigerator, stove, washing machine), brown goods (TV and stereo) and portable appliances. At the same time, the prices of appliances and equipment rose 7.46% in the same period, up 20.43% in the 12 months through March, according to data from IBGE and the Extended Consumer Price Index (IPCA), reflecting the higher production costs in the industry.
The war in Ukraine and the new outbreak of Covid-19 in China further aggravate a situation considered “challenging” by executives, who want to avoid a negative tone. The Asian country is shutting down plants due to lockdowns, especially in Shanghai, which impacts some companies.
Some companies are already seeking new suppliers of inputs – dual sourcing has expanded because of problems faced during the pandemic – and also air freight to shorten travel times for some products, while others are adopting a wait-and-see approach. Officially, all companies rule out the possibility of interrupting lines, but part of the market may face this risk.
Sergei Epof — Foto: Divulgação
“The drop in the first quarter is very much related to the consumer’s cash flow. Inflation has risen sharply and default rates too. The money available among Brazilian consumers for buying home appliances has been used for food, electricity and gasoline,” said Sergei Epof, Panasonic’s vice president of appliances in Brasil. His team focuses mainly on the white line, since the company halted the production of the brown line in the country last year, following a global strategy.
The Brazilian market is experiencing a combination of weaker demand, more expensive goods – as higher costs are passed on to prices – and more expensive credit, he said. Given the high interest rates, the consumer has been paying more for loans and default rates are on the rise.
“Demand has fallen and the price of appliances has risen. We had a lot of cost increase, which includes international freight, because of oil, the foreign exchange rate, which remains high despite the small recent drop, and inputs such as steel, resin and semiconductors,” Mr. Epof said. Part of the cost was passed on to consumers, he added.
As a result of inflation of inputs and falling purchasing power, “demand virtually disappeared,” said Marcelo Campos, managing director at Esmaltec. The company, which makes household appliances for Ceará-based Edson Queiroz group, has seen disappointing results since the middle of last year, especially in the last quarter of the year, typically a good time for durable goods sales due to Black Friday and the holidays. This happened after a surge in demand for appliances after the initial months of the pandemic, as people stayed at home.
The higher cost of components especially impact companies like Esmaltec, which works with the so-called entry-level products – those with lower prices, Mr. Campos said. Steel rose 163% in 2021, according to him, and is up 20% this year. This affects items such as compressors, evaporators and condensers for refrigerators. “Part of the cost has been passed on to consumers, but there is also a great effort to review negotiations with suppliers and processes to hold on some of the pressure,” he said.
The worsening of Covid-19 cases in China brought back the concern of shutdown factories at a time when the supply of inputs was already normalized, said Silvia Tamai, head of marketing for Latin America at Philips Walita, the company’s division of portable appliances.
“The situation of delays and lack of inputs had already been very much reduced. Our prospect in January was very positive as we had returned to a normal level. But the situation started to concern again around a month and a half ago.” Despite that, she still expects higher sales volumes in 2022 than last year.
The problems affect both the inputs used directly in the plant in Varginha, Minas Gerais, and the portion of products imported directly from other units, such as some models of coffee makers that come from Europe. Most of the inputs and products are produced in Brazil, she said, but even so the imported ones impact the production flow.
“There is a filter that goes into the espresso machine that comes from China. We bring the product from Europe, but they also depend on some component that comes from China,” she said.
Electrolux said in its global first-quarter financial report that falling sales in Latin America are linked to the decline in demand in Brazil, since inflation and high interest rates affected consumers’ purchasing power.
Whirpool, owner of Brastemp and Consul brands, did not mention the situation in Brazil in its first-quarter report, but predicted a decline in the household appliance industry as a whole in Latin America, Europe, Middle East and Africa this year.
The combination of higher revenue flow, driven by surprising growth in tax collection, cash availability and rising interest rates raised the income from financial investments by states and municipalities in the most recent period. These revenues totaled R$17.7 billion considering states and state capitals in the 12 months through February. This is more than two times, in real terms, the amount seen in the previous period – R$7.8 billion. In relation to the 12-month period through February 2020, the pre-pandemic period, the real increase is 25%.
With the hike in Brazil’s benchmark interest rate Selic last Wednesday, to 12.75%, and still high cash availability, revenues are expected to increase even more this year given the expected lengthening of the monetary tightening cycle to tackle inflation.
In the case of capital cities, which totaled income revenue of R$3.9 billion in the 12 months through February, the amount is equivalent to 8.5% of service tax ISS revenue collected in the same period. The amount is less representative for states. There were R$13.8 billion, or little more than 2% of sales tax ICMS. This tax is the most important one for states, with the largest collection in the Brazilian tax system, equivalent to 7.6% of the GDP in 2021.
“We are going to see revenue from financial investments rise even more this year,” said Juliana Damasceno, an economist with Tendências and an associate researcher at Fundação Getulio Vargas. The increase in the 12 months through February this year reflects the strong monetary tightening cycle last year, when the Selic was escalating, she said. “In 2022, we already have a double-digit interest rate,” she said. This will lead to income revenue growth, even though we no longer have the same help from the revenue cycle, which advanced over the past year with some economic growth, but with “a very strong contribution from inflation.”
As for the capital cities, there was also a gradual pickup in services after the sharp decline in 2020 under the impact of the Covid-19 pandemic, she said. The scenario was conducive to improved revenue flow and greater cash availability.
The cycle of interest rate hikes and revenue growth have the “same root, which is the rise in inflation,” Ms. Damasceno said. “We shouldn’t celebrate fiscal adjustment because of inflation or because of the medicine used to fight it, which is high interest rates. We know the harmful effect that the lengthening of the monetary tightening cycle has on the economy,” she said, citing the effect on consumer spending and household indebtedness amid a very critical social situation.
The data on income from financial investments were collected by Valor based on state reports submitted to the National Treasury Secretariat. The revenues received were considered, adjusted by Brazil’s official inflation index IPCA in the 12-month periods to February 2020 and 2021.
Most municipalities are likely to benefit from the higher Selic on revenues from investments, said Giovanna Victer, Secretary of Finance of Salvador and chair of the national forum of municipal secretaries of Finance within the National Front of Mayors (FNP). Those in debt are the exception because the higher interest rates and inflation increases the debt service. In the capital city of Bahia, according to the fiscal reports, these revenues totaled R$130.2 million in the 12 months through February, almost three times, in real terms, the amount reported in the previous 12-month period (R$45.5 million) and up 7% from the 12-months period through February 2020.
Among capital cities, São Paulo stands out. Brazil’s most populous city totaled R$1.6 billion in revenue with income from financial investments in 12 months to February this year, compared with R$517.8 million in the previous 12 months. The city also saw an increase of 93.3% compared with the period from March 2019 to February 2020.
The great advantage of those revenues is that they are not earmarked, said George Santoro, who was Finance Secretary of Alagoas until May 4. The revenues are mostly free and are not subject to the constitutional allocations for health and education. One exception is revenue from the Fund for Maintenance and Development of Basic Education (Fundeb) and some other transfers. In these cases, the investments follow more limited rules and the earnings are earmarked for the same purpose as the funds that gave rise to them.
According to the fiscal reports from Alagoas, the revenue with income from investments in the state totaled R$251.7 million in the 12 months through February, compared with R$73.8 million in the previous 12 months. In relation to the same period to February 2020, the increase was 70.3%.
Felipe Salto, Secretary of Finance of the State of São Paulo, says that the funds are likely to help execute investments planned for this year. The higher revenue from financial investments results from the increase in tax collection thanks to the state’s economic growth, he said, which made possible a cash availability of R$34 billion. According to the state reports, these revenues totaled R$3.1 billion in the 12 months through February 2022, almost four times the amount seen in the previous period (R$802.41 million) and two times the amount collected through February 2020 (R$ 1.63 billion) in real terms.
“This income is important, but it is not a trend in the medium term,” he said, considering the broader factors that contributed to the higher collection in 2021. He recalled that last year the collection of ICMS rose 17% year over year, in real terms. The perspective for this year is of “much milder growth,” between 3% and 4% in real terms.
In addition to the cyclical nature that led to the growth in revenues of the subnational entities, Ms. Damasceno said states must know that inflation and interest benefit revenues at first, but then take a toll on expenses. “The scenario provokes pressures for adjustments not only of servants, as we have seen since the beginning of the year but also of suppliers.” The effect on spending, she said, can happen more in the medium and long term. “You can’t get there in debt and have spent all that revenue. There may be a delay, but this adjustment will happen,” she said.
Ms. Victer, from Salvador, agrees that although revenues still reflect a recovery in the service sector, the picture is not one of tranquility, and caution is necessary in order not to commit “seasonal and temporary” resources with permanent expenses.
The more recent scenario of better revenue flow has led the states to better invest funds, Mr. Santoro said. One challenge, however, is the limitations of the public power to tap financial instruments. He recalled that early last year, the state held a bidding process to get a better return on investments for about R$400 million in cash surpluses.
The call for bids imposed several restrictions on the participating institutions, such as net worth and other indicators, the former secretary said. The winner, he recalled, was a private-sector bank that offered yields above 110% of the interbank deposit rate (CDI). The State Prosecutor General’s Office, however, understood that the government was prevented from contracting with private-sector institutions. State-owned banks, he said, offered at the time 95% of the CDI. The issue was taken to the Economy Ministry, in search of more flexible rules, but there was no success, which led the state to contract other financial investments with state-run banks.
After announcing the possibility of paying the property tax IPTU with cryptocurrencies as of 2023, the City of Rio de Janeiro is now studying investments in this new asset.
In a note, the Rio de Janeiro Finance Secretariat told Valor that the city mulls “a cryptocurrency investment policy and a governance model for decision-making.” According to the note, a Municipal Committee of Investments in Cryptocurrencies will be created to refine the methodology. The municipality also said that in March it reached a cash balance of R$9 billion, the result of a cost-cutting effort, expense containment and structuring measures, such as the new fiscal regime and a tax overhaul.
The hike in diesel prices by Petrobras in refineries is imminent, Valor has learned. The product had, on Friday, a difference of about 20% in relation to prices on the global market. A partial recomposition of prices, in relation to the international parity, is important, at this moment, not only for Petrobras but also for other market players, such as private refineries and importers. The measure, if confirmed, will relieve the pressure on the state-owned company, and may facilitate the purchase of the product abroad by smaller companies, reducing the risk of shortages, a hypothesis that has been denied both by the company and the government.
The situation is complex, which has required discussions at Petrobras’s top management. On Friday, at the end of the day, the board of directors of the oil giant met to analyze a possible position facing the continued attacks of President Jair Bolsonaro on the company, as anticipated on Friday, Valor PRO, the real-time news service of Valor.
A response would be necessary in the face of president Bolsonaro’s virulence. On Thursday, moments before the release of Petrobras’s first quarter results, he compared the company’s profit to a “rape”. On Saturday, in Santa Rosa (state of Rio Grande do Sul), Mr. Bolsonaro criticized Petrobras again, saying that “no one can stand” the fuel increases. Informed about everything that happens in Petrobras, he speaks to his supporters knowing the limitations to intervene in the state-owned company.
Valor has found that there was no consensus in the board to produce a statement. The answer should come, therefore, in the form of a diesel hike by the company in a percentage that would cover most of the current gap. Petrobras did not immediately reply to a request for comment.
The market scenario for diesel is worrisome. On the external front, the price continues to rise as a result of the post-pandemic recovery and supply cuts resulting from the war in Ukraine. Russia accounts for about 25% of global diesel exports. The past few weeks have seen record diesel price increases in the United States.
The refining margins on diesel are twice as high as on gasoline. The increase in the price of the product in the Northern Hemisphere has effects for imports in Brazil. The diesel that will arrive in the country in July is being purchased now. But the extent to which Petrobras holds back the rise inhibits imports, since the price of the imported product arrives in Brazil at a higher price than that sold at the Petrobras refineries.
In the domestic market, the demand for diesel is still on the rise and there are concerns that the growth in consumption, driven by agribusiness, may lead to shortages in the second half of the year in some regions. The government and Petrobras have denied there is a risk of shortage of the product, which is fundamental to the farming and livestock sector and is essential in cargo transportation.
In an interview to Valor, Décio Oddone, former director of the National Petroleum Agency (ANP), also said he doesn’t believe in a shortage as long as the country follows the external price “fluctuations”.
On Friday, commenting on Petrobras’s results in the first quarter, Chief Trading & Logistics Officer Claudio Mastella ruled out the risk of shortage in the country. He said that the market is supplied by the national refining park and imports. Petrobras monitors the international markets and evaluates fuel prices daily, said Mr. Mastella.
Jose Mauro Coelho — Foto: Bruno Spada/MME
Still on Friday, the CEO of Petrobras, José Mauro Coelho, said that the state-owned company is one of the companies that most collects taxes and government participation for the different spheres of government, with more than R$70 billion collected between January and March. Mr. Coelho said that the company is not insensitive to society, and cited the company’s program to help low-income families to have access to liquefied petroleum gas (LPG).
(Nelson Niero, in São Paulo, contributed to this story)
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